Friday, February 1, 2008

The Stock Market and Government Intervention

The stock market is not, as this and every other article treats it, the economy. It's not even like the economy. The economy is a heart - it drives the entire body. The stock market, by contrast, is the spot on my wrist that I can use to take my pulse. In fact, exactly like that.

Because of this fact, when the government tries to 'inject liquidity' into the stock market, it's exactly like injecting blood into my wrist, from another part of my body...as a strategy for increasing my blood pressure.

Naturally, this is, compared to its objectives, unfathomably harmful.

The economy is about the exchange of objects to accumulate value.

Notably, there is no objective way to define value. It's totally subjective, but it does exist. Because it's subjective, it doesn't have to be conserved, which leads to the real difference between the wealthy and the poor. While it's true that wealthy people generally have more objects than the poor, the real difference is because the wealthy have more things they value, and these things happen to be objects. They have taken advantage of the nonconservative nature of value by trading things they value less for things they value more, reciprocally. Wealthy people simply do this more effectively.

Notice that these trades do not, in themselves, significantly change the physical world. A camper is traded for some dollars which are traded for some building materials, say. Now, the dollars, camper, and two-by-fours are in a different place, and could easily be moved back, but suddenly the total wealth and value of the arrangement has greatly increased.

(This is, naturally, one reason government redistribution never works. There's no way for the government to determine who really values what, which means it will inevitably destroy wealth on a disastrous scale, compared to anything it tries to do.)

(The only way (we know of) to determine what people really value is to put it up for auction on the free market. Government is simply the manifestation of the idea that people want the wrong things. )

It's these trades that actually increase wealth. Production is quite separate. Production is merely motivated by the future possibility of these trades; without that production would halt.

This is the basic truth of a recession. The expectation of future trades diminishes, and so production declines, ensuring that through normal wear and tear, wealth declines, and everyone feels the pinch.

What does this have to do with the stock market? In a healthy society, nothing you'd ever need to worry about. Why not?

Because the stock market does not trade in anything of real value. No one values stock in and of themselves, but only as a means to obtain new things they do value.

Similarly, dollars are not true wealth. The only real value to dollars is that they facilitate trade, they are never an end, a value, unto themselves, unlike campers and two-by-fours. Also unlike similarly intangible but truly valued things like communication or the various types of security, or a feeling of well-being from a massage or similar service.

Stock is, actually, very like the banknotes that, way back, actually preceded fiat currency, back when banknotes were in fact notes from the bank. Both are, in a very real sense, merely currency.

Currencies all take their entire value from the fact someone will agree to trade that currency for something of real value.

So, the stock market is a big currency exchange. This gets a bit complicated and subtle, so I'm glossing over some things. Regardless, like all currency exchanges, a stock market cannot truly create or destroy wealth. Every dollar 'lost' to a portfolio is merely gained by another portfolio.

And, like all currency exchanges, it can tell you something about the conditions affecting the underlying real values backing the currencies. It cannot, or rather should not, affect those underlying values.

It doesn't matter what happens to your money. If you value huge, delicious steaks, the only reason you value your dollar is because it represents, to you, huge, delicious steaks. The association cannot run in reverse.

As such, the stock market can tell you stuff about the issuing entities - the corporations. (A word that just means 'reification of legal arrangement,' in this case reifying through a corpus - pretending that the legal arrangement is a body, a person.) It cannot, however, work in reverse. Indeed, if I own a factory that makes huge, delicious steaks, does that factory care what its stock price is? Do the buyers of my steaks? My workers?

That would be hilarious actually."Crap! I bought this steaks, but the corporation's stock price crashed yesterday and now it tastes terrible. Ugh.""Urgh! Cheap stock steak! Gross! I hate it when that happens."

The stock market is the pulse of the market - not its heart.

In short, the Great Depression wasn't caused by a stock price collapse. That's preposterous. The stock price collapse was caused by the Great Depression.

There is, of course, one problem with this analysis. It's pretty clear that our economy is affected by what happens in the stock market. Why is this?

Basically, because of the government.

Through various, generally unrelated intentional corruptions, government regulation is now supporting a situation where the actions of America's Wall Street account for, I'm not making this up, half of all American economic activity. The situation is similar in all wealthy countries.

And even this wouldn't be a problem. It doesn't matter if Wall Street accounted for 90% of the economy, it still can't break logical truths. The currencies are valuable because they can be traded. For steaks.

However, the basic support government is providing, without which Wall Street would have to contract drastically, is risk protection. Some institutions have been perceived as too big to fail. There's an actual policy named after it.

Since the people in these institutions aren't dumb, and higher risks generate higher payoffs, this has naturally lead to a drastically blase attitude to high risk. After all, if an investment fails, the government is going to bail them out. They can't lose.

I suspect this is due to a basically voodoo association between the stock market and the economy. The stock market suffers when the economy tanks. It's hard to see the economy, but easy to see the stock market. Therefore, the association gets made between recessions and stock market failures.

As a result, lobbyists can successfully convince lawmakers to prop up the stock market as a method of controlling the economy.

Is my little sub-theory true? Is this voodoo? Well, the opposite is surely false. The Americans are right now pumping vast sums of 'liquidity' into their stock market...but the economy is still tanking.

But wasn't the tanking economy due to the subprime thing? Isn't that simply an extention of the stock market? Yes! So how, according to my theory, did it affect the real economy?

Ask yourself: "Where does the money for these 'liquidity injections' come from?"

The simple answer is, "From the money-printer."

But value cannot be created out of nowhere. Despite being subjective, and nonconservative, it still exists. As I've repeated already, money is valuable only in relation to real values.

Creating more money only causes...drumroll...inflation. Or, for those who read the John Law piece, debasement. The philosopher's stone of taxation.

And this is how the stock market affects the real economy in diseased societies, like ours.

All these 'liquidity injections' represent massive tax levies at the expense of anyone who has a positive asset balance. And while the dollars aren't value themselves, they do represent someone of value that has been previously traded. It's value waiting to be realized, except now it's being realized at Wall Street, by investment bankers, instead of by the person who actually created the value.

Naturally, their store of excess value depleting, these people start sending signals that they won't be engaging in future trades. Which causes stock prices to fall, in addition to various other financial instruments. Which means the bad investments are going to get worse. Which means there will be more 'liquidity injections.' Which means there will be more debasement. Which means these people will start sending signals that...

When I said unfathomably harmful, I meant it. As said in Hazlitt's Economics in One Lesson, we never see all the things we would have made with the destroyed wealth. We only get to see the protected wealth on Wall Street. Cuz you know, that's where it's needed most.

Because, obviously, government has only our interests at heart. It is our mommy, after all. Or we own the thing, or something like that? We vote, right? This is a democracy, right? Yeah, something like that.